Cryptocurrency Explained to a Five-Year-Old

Editor’s Note: This series of “ELI5” articles is aimed at beginners entering the world of cryptocurrencies, DeFi, NFTs and Web3 with many questions in mind. ELI5 refers to the famous English acronym that means “Explain to me as if I were five years old”. The aim is not to infantilize the reader, but simply to give him keys to understanding, so that the complicated vocabulary of the cryptosphere in the broad sense becomes child’s play as if by magic!

The cryptocurrency is a term that has become very popular lately. However, it is not always easy for a neophyte to understand what it is. The general public often associates Bitcoin with the term cryptocurrency, but it is generally all they know.

In this post we try to explain to you as simply as possible what a cryptocurrency is. This will allow you to better understand this rather specific universe.

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Cryptos, digital assets, virtual currencies, etc. Kezako?

When you consult specialized sites, you will notice that not only the term cryptocurrency is used. In reality, it is possible to use many different names to talk about the same topic.

Depending on the resources you consult, you may hear about crypto assets (sometimes without the hyphen), digital currencies, cryptos, virtual currencies, digital assets, virtual currencies, and many other terms commonly used to talk about cryptocurrencies.

Even if all these terms are not necessarily exact synonyms and some are not the most appropriate, they will still be used as such by many authors. So you will have to learn to deal with this state of affairs.

Can we consider cryptos as a real currency?

In reality, cryptocurrencies don’t really have the features of a traditional currency. Simply put, the major criticism of this new asset class is its high volatility. Indeed, it is not uncommon for the unit value of a crypto asset to be multiplied or divided by 2 within a few days.

Therefore, many people in this industry prefer to use a designation that does not refer to the term “currency”. This avoids confusion and opponents criticizing this new asset class because of this reference.

However, some people believe that cryptos can be used as currencies. For example, it is possible to receive your salary in Bitcoin, transfer money in the form of cryptos to friends or pay for certain services with digital means.

What is the difference between a coin and a token?

As you read, you will undoubtedly notice that we sometimes speak of coin or token to indicate a cryptocurrency. Even though nothing changes when you invest, it is interesting to understand the fundamental differences between these two types of cryptos.

To keep it simple, a coin is a cryptocurrency that has its own blockchain. It is possible to create new coins through a mining process or some other kind of consensus. A token, on the other hand, uses the blockchain of another cryptocurrency to function, such as the Ethereum network and ERC-20 tokens. All tokens are generally issued as soon as they are created, although sometimes some are not immediately in circulation.

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Yet most specialized sites regularly make the mistake of confusing these two terms. So very often they use coin and token as two synonyms. So keep this in mind when reading.

What are Security Tokens and Utility Tokens?

The different tokens can also be classified into two main categories. The ones called “security” and the ones called “utility”. We use the term token, but it also groups coins into these categories, such as Bitcoin or Ethereum.

Again, to simplify things, a utility token is a cryptocurrency that has at least one utility. For example, it could be a token that offers discounts on exchange transaction costs or that gives access to additional services.

A security token, on the other hand, should be thought of as a financial security, as, for example, a stock would be. At least that’s how the US stockbroker, the SEC, sees it. In addition, whether a cryptocurrency is a security or a utility can also vary by country. For example, the US may decide that a cryptocurrency is a security, while France may consider it to be a utility.

Cryptocurrency: What to Remember?

The term cryptocurrency refers to projects evolving in the blockchain universe. In general, you can find the list of different cryptos on sites like CoinMarketCap Where CoinGekko

The different cryptos on CoinMarketCap

Strictly speaking, we can’t really talk about money if we rely on traditional definitions. Instead, we should rather classify cryptos as a new class of asset that tends to be accepted little by little by economic circles.

Cryptocurrencies can be either coin or token type depending on their technical characteristics. In addition, any digital asset can be considered a utility or a security, even if countries sometimes have a different legal qualification for a particular cryptocurrency.

Explore more crypto vocabulary terms

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To invest in cryptocurrency mining or masternodes:

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  • In poker on the CoinPoker gaming platform
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